OYO Geospace Corporation — Form 10-Q summary
Business context and reporting period
OYO Geospace designs and manufactures seismic acquisition and reservoir-monitoring equipment, and thermal imaging products. Its two reportable segments are Seismic and Thermal Solutions. This unaudited filing covers the quarter and nine months ended June 30, 2011, compared with the corresponding 2010 periods. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Quarter ended June 30, 2011 | Quarter ended June 30, 2010 | Nine months ended June 30, 2011 | Nine months ended June 30, 2010 |
|---|---|---|---|---|
| Sales | $46.4 | $35.3 | $140.2 | $92.4 |
| Gross profit | $20.6 | $14.9 | $61.3 | $32.4 |
| Gross margin | 44.3% | 42.2% | 43.8% | 35.0% |
| Operating income | $13.5 | $7.7 | $38.4 | $13.7 |
| Net income | $9.2 | $5.1 | $26.1 | $9.0 |
| Diluted EPS | $1.44 | $0.81 | $4.15 | $1.45 |
- Quarterly sales rose 31.4%; nine-month sales rose 51.7%. Seismic segment revenue increased 33.9% for the quarter and 57.5% for the nine months. Thermal Solutions revenue rose modestly, but the segment reported a quarterly operating loss of $0.3 million and a nine-month operating loss of $0.2 million.
- Operating margins were 29.1% for the quarter and 27.4% for the nine months, versus 21.8% and 14.8%, respectively, in 2010. Management attributed stronger gross profit and operating results to higher seismic sales and rentals, improved product mix, and better factory productivity.
- Operating cash flow was $11.8 million for the nine months, down from $17.0 million. Net income was partly offset by a $29.1 million inventory increase, chiefly to replenish wireless acquisition-system stock and support expected demand. Investing cash outflow was $2.0 million; capital expenditures were $16.8 million, largely offset by $16.7 million of used-rental-equipment sale proceeds. Financing cash outflow was $4.0 million, including a $7.7 million mortgage payoff.
- At June 30, cash and cash equivalents were $39.2 million, with $1.9 million in short-term investments. Current assets were $144.8 million and current liabilities $29.0 million. The company had no debt outstanding; its $25 million revolving credit facility was fully available. Total assets were $198.8 million and stockholders’ equity was $167.9 million.
Material changes and management commentary
- Management cited stronger seismic market conditions and demand for the wireless data acquisition system, marine products, reservoir products, and rentals. During the quarter, the company sold 14,850 channels from its rental fleet; more than 12,000 channels remained available for rental.
- Inventory increased to $73.0 million from $47.4 million at September 30, 2010. The obsolescence reserve rose to $10.4 million from $6.6 million; management noted continuing charges related to older, slower-moving products.
- The company repaid its $7.7 million mortgage in December 2010 and entered a new $25 million secured credit agreement in March 2011, expiring March 2, 2014. No borrowings were outstanding at quarter-end.
Outlook, risks, contingencies and unusual items
- Management estimated fiscal 2011 capital expenditures could total approximately $20 million, including non-cash rental-fleet additions, and said cash, operating flows and/or the credit facility were expected to fund them. It stated liquidity was sufficient for working-capital needs over the next 12 months. No specific revenue or earnings forecast was provided.
- The company may expand its wireless rental fleet to 30,000 channels or more depending on demand. Management said second-half fiscal 2011 incentive expense was expected to be substantially below the first half, when the initial $3.5 million pool had been fully accrued. The board increased the pool to $3.8 million after the company achieved its third-quarter pretax-income target and was considering a similar fourth-quarter increase.
- Key exposures include the cyclicality of oil and gas activity, inventory obsolescence, foreign-currency risk from its Russian subsidiary, and floating rates on any future credit-facility borrowings. A 10% adverse move in the dollar/ruble rate could reduce working capital by approximately $0.7 million; the company does not hedge its Russian operating exposure.
- The Ascend Geo patent-infringement case concerning the GSR wireless system was dismissed with prejudice in January 2011, and the Patent and Trademark Office cancelled all claims of the asserted patent in April 2011. The court denied the company’s request for reimbursement of legal expenses. The IRS was auditing federal returns for fiscal 2007–2009; management did not expect a material effect. The filing reported no material changes to previously disclosed risk factors.
- The filing reported $0.3 million of bill-and-hold sales at June 30, 2011, versus none a year earlier. Inventory obsolescence expense for the nine months was $3.8 million, compared with $1.6 million in 2010.
Important facts for investors to verify
- Whether strong wireless-system demand and recent rental-fleet sales are sustainable, and how sales affect future rental capacity and recurring rental revenue.
- Inventory composition, expected conversion to sales, and adequacy of the $10.4 million obsolescence reserve amid higher inventory levels.
- Actual fiscal 2011 capital expenditures, rental-fleet additions, and cash generation after working-capital needs.
- Thermal Solutions’ margin pressures and whether that segment can return to operating profitability.
- Progress and outcome of the IRS audit, foreign-exchange exposure, and compliance with the new credit agreement’s covenants.